Last year, the Federal Trade Commission (FTC or Commission) and Consumer Financial Protection Bureau (CFPB or Bureau) each filed enforcement actions against mobile carriers for allegedly charging consumers for third-party subscription services that the consumers never authorized. First, the FTC filed lawsuits against T-Mobile USA and AT&T Mobility. FTC v. T-Mobile USA, Inc., Case 2:14-cv-00967 (W.D. Wash. July 1, 2014); FTC v. AT&T Mobility, LLC, Case 1:14-mi-99999-UNA (N.D. Ga. Oct. 8, 2014). Then, the CFPB sued Sprint Corporation. CFPB v. Sprint Corporation, Case 14-cv-9931 (S.D.N.Y. Dec. 17, 2014). The FTC and CFPB alleged virtually identical conduct by the carriers and that the conduct was either "unfair" or "deceptive" under Section 5 of the Federal Trade Commission Act (FTC Act), 15 U.S.C. § 45, in the FTC case; and under Sections 1031 and 1036 of the Consumer Financial Protection Act (CFPA), 12 U.S.C. §§ 5531 and 5536, in the CFPB case. But while the cases appear to be the same at first blush, there are key differences in the legal theories pursued by each agency. This article explores these differences and what they tell us about the past, present, and future of each agency.
The Agencies' Factual Allegations
At their core, the factual allegations in these three cases are virtually identical. In all three cases, the agencies allege that the carrier charged consumers for third-party subscription services that the consumers never authorized, a practice known as “mobile cramming.” Specifically, the agencies allege that the carrier violated the law by:
- In addition to charging for its own phone services, the carrier charged many consumers for other services offered by third-party merchants, such as monthly subscriptions for content such as ringtones, wallpaper, and text messages providing horoscopes, flirting tips, celebrity gossip, and other similar information;
- The carrier charged consumers for third-party subscriptions that the consumers did not order or authorize;
- The carrier continued to charge consumers for third-party subscriptions despite numerous red flags, such as consumer complaints, high refund rates, and law enforcement actions;
- The carrier reaped substantial profits from the third-party subscriptions; and
- Consumers incurred millions of dollars in illegitimate charges.
The Agencies' Legal Theories
Notwithstanding the identical conduct at issue, the legal theories of the two agencies differ in significant ways, even though they are using virtually identical statutory provisions. The FTC Act and CFPA each prohibit "unfair" or "deceptive" acts or practices. (The CFPA also prohibits "abusive" acts or practices.) Under both statutes, an act or practice is unfair when: (1) it causes or is likely to cause substantial injury to consumers; (2) the injury is not reasonably avoidable by consumers; and (3) the injury is not outweighed by countervailing benefits to consumers or competition. In determining whether an act or practice is unfair, the agencies may consider established public policies as evidence to be considered with all other evidence, but public policy considerations may not serve as the primary basis for such determination. The agencies also apply the same deception standard. A representation, omission, act, or practice is deceptive when: (1) the representation, omission, act, or practice misleads or is likely to mislead the consumer; (2) the consumer's interpretation of the representation, omission, act, or practice is reasonable under the circumstances; and (3) the representation, omission, act, or practice is material to consumers. See FTC Policy Statement on Deception and CFPB Supervision and Examination Manual, Version 2, p. 178.
FTC Complaint Counts
The FTC was the first of the two agencies to sue mobile carriers for cramming. The FTC complaints against the mobile carriers contain two counts. In Count I, the FTC alleges that the carrier engaged in deceptive acts or practices by misrepresenting that charges appearing on consumers' phone bills are for the carrier's services authorized by consumers, when in fact the charges included third-party subscriptions that the consumers had not authorized. In Count II, the FTC alleges that the carrier engaged in unfair acts or practices by charging consumers for third-party subscriptions for which consumers have not provided express, informed consent.
CFPB Complaint Count
In contrast, the CFPB's subsequent lawsuit against Sprint does not allege deception. And although it alleges unfairness, it does so in a very different way than the FTC. While the FTC unfairness theory hinges on the lack of express, informed consent by consumers, the CFPB unfairness theory appears to challenge a combination of the carrier's practices, such as (1) enrolling customers in third-party billing without their authorization; (2) giving third parties access to its customers and its billing system without implementing adequate compliance controls; (3) failing to adequately resolve customer disputes; and (4) ignoring warnings from customers, government agencies, and public-interest groups. After describing these practices, the CFPB's complaint count concludes that "Sprint's acts and omissions, including its failure to take reasonable steps to prevent unauthorized charges, caused or were likely to cause substantial injury to consumers that they could not reasonable avoid and were not outweighed by countervailing benefits. . . . Sprint's actions and omissions were therefore unfair."
FTC Unfairness Approach
These differences are more than just style, and reflect two agencies at very different stages of life. The FTC is a 100-year-old agency that has evolved and learned from its past, in particular with regard to its use of unfairness. See J. Howard Beales III, “The Federal Trade Commission's Use of Unfairness Authority: Its Rise, Fall, and Resurrection,” Journal of Public Policy & Marketing, Fall 2003, Vol. 22, No. 2, pp. 192–200. As described in greater depth in the Beales article, the FTC engaged in a series of rulemakings in the 1970s "relying upon broad, newly found theories of unfairness that often had no empirical basis . . . and did not have to consider the ultimate costs to consumers of foregoing their ability to choose freely in the marketplace." The most prominent example occurred when the Commission considered using unfairness to ban advertising directed to children on the grounds that it was "immoral, unscrupulous, and unethical." The FTC paid the price for overreaching. A Washington Post editorial criticized the FTC, calling it the "National Nanny." At one point, Congress refused to provide the agency with necessary funding, and simply shut it down for several days. Other consequences followed. Congress restricted the agency's ability to use unfairness in new rulemakings to restrict advertising, and it did not reauthorize the FTC for 14 years.
As the Commission struggled with the proper standard for unfairness, it moved away from public policy and other more ephemeral criteria, and toward consumer injury and consumer sovereignty as the appropriate focus of unfairness. In other words, the FTC's focus shifted from the morality of the practice to the impact of the practice on consumers. In 1980, it adopted the Unfairness Policy Statement, setting out the three-part test eventually codified in the FTC Act, 15 U.S.C. § 45(n) – the same three-part test for unfairness under the CFPA, 12 U.S.C. § 5536(c). In addition to showing that the act or practice is likely to cause substantial consumer injury, the FTC (and now the CFPB) must show that consumers could not have reasonably avoided the injury through the exercise of consumer choice and that the injury is not outweighed by benefits to consumers and competition. As stated in International Harvester Co., 104 F.T.C. 949, 1061 (1984), this ensures that the "Commission does not seek to mandate specific conduct or specific social outcomes, but rather seeks to ensure simply that markets operate freely, so that consumers can make their own decisions."
This is only a brief description of the FTC's long history with unfairness, and why it moved away from trying to restrict distasteful market practices to instead working to promote informed consumer choice in the marketplace. The mobile cramming cases are an example of the FTC's modern use of unfairness. In those cases, the FTC alleged that the carriers unfairly charged consumers for third-party subscriptions for which consumers have not provided express, informed consent. Given its uneven history with unfairness, the FTC often pursues alternative deception theories, and the mobile cramming cases are no exception – there, the FTC alleged that the carrier misled consumers that the third-party charges were for its own services and authorized by the consumer. The FTC's unfairness and deception counts are flip sides of the same coin, as they each hinge on the lack of informed consumer consent. Therefore, the remedy is the same. The FTC's consent decrees with the carriers do not ban them from processing third-party charges on consumers' bills (such processing can have benefits for consumers such as the ability to easily purchase ringtones or to quickly make charitable contributions when natural disasters occur). Rather, the carriers must: (1) obtain consumers' express, informed consent before placing any third-party charges on a consumer's mobile phone bill; (2) clearly indicate any third-party charges on the consumer's bill; and (3) provide consumers with the option to block third-party charges from being placed on their bill. In other words, so long as consumers are fully informed and choose to pay charges through their phone bill, there is nothing unfair in allowing them to do so.
CFPB Unfairness Approach
What should we infer from the CFPB's different approach in the Sprint case, following so closely on the heels of the FTC cases? The CFPB did not allege, as did the FTC, that the carrier deceived consumers about third-party charges appearing on their phone bills. Given the Bureau's allegations of high refund rates and consumer complaints, it certainly could have supported a deception claim. Nor did the CFPB follow the FTC's lead in pleading unfairness. Rather than focus on consumer sovereignty and choice, the CFPB appears to challenge a combination of the carrier's practices, including (1) enrolling customers in third-party billing without their authorization, (2) giving third parties access to its billing system without implementing adequate compliance controls, (3) failing to adequately resolve customer disputes, and (4) ignoring red flags. The Bureau's actual unfairness count simply concludes that "Sprint's acts and omissions, including its failure to take reasonable steps to prevent unauthorized charges," were unfair. Mobile cramming – charging consumers for third-party charges on their phone bills without their knowledge or consent – seems clearly illegal, so why did the CFPB go to such lengths to both describe and obscure the nature of the unfair practice being challenged? And again, if the Bureau believes that consumers were charged without their authorization, why did it not include a deception count? One possible explanation is that the Bureau is seeking a more aggressive remedy than a narrow deception or unfairness count would support. The Bureau might believe that requiring disclosure and informed consumer consent for third-party charges on phone bills is not adequate to protect consumers. The Bureau may be pursuing a broader unfairness theory and, in doing so, putting itself in a position to seek a ban of any third-party charges on consumers' phone bills. We can't be sure of the Bureau's position, however, since the case remains in litigation. (After this article was written, the CFPB and Sprint reached a proposed settlement, which remains under court review at this time.)
The CFPB was created by the Dodd-Frank Act and has been in existence less than four years. It was created to protect consumers in the wake of the worst financial crisis in decades. One could not fault the CFPB for believing it has a mandate to do more to protect consumers than the agencies that preceded it. At the same time, the CFPB does not have the FTC's history of overreaching with its unfairness power. Moreover, the CFPB has a new tool that the FTC does not have – the power to prohibit "abusive" acts or practices, a broad concept without any history defining it. Much has been written about how the agency is using its "abusive" authority. See, e.g., E. Mogilnicki and E. Moran, “Understanding and Applying Dodd-Frank's ‘Abusive’ Standard,” 104 BNKR 161, 01/27/2015; E. Mogilnicki and E. Moran, “The CFPB's Enforcement of the Prohibition of Abusive Acts or Practices,” 104 BNKR 236, 02/03/2015. As a result, there has been much less focus on how the agency is using its unfairness authority, although the same potential for overreaching exists. The Bureau is, in fact, using its unfairness authority in a variety of areas, including private student lending, small dollar lending, debt collection, and mortgage servicing.
The different approaches taken in the mobile cramming cases reflect two agencies at different stages in their lifecycle. The FTC is a 100-year-old agency and its focus on disclosure and informed consumer consent is a result of trial and error in its use of unfairness. Some might consider the FTC overly cautious and conservative, in particular in the wake of the financial crisis. The Bureau is a young agency in its formative years without a history of political or legal losses in its use of unfairness. Some might say the CFPB is overly aggressive, willing to take risks for potentially big gains without fully considering the costs and benefits. In the end, both agencies share the same goal of protecting consumers.